Although the 401(k) is today the primary retirement-savings vehicle for many hardworking Americans, it can be easy to forget that the 401(k) is still a relatively new phenomenon.
Consolidation Corner is the Retirement Clearinghouse (RCH) blog, and features the latest articles and bylines from our executives, addressing important retirement savings portability topics.
Today, Boston Research Technologies (BRT) and Retirement Clearinghouse (RCH) issued a joint press release announcing the key findings from a survey examining the retirement industry’s missing participant problem. The survey, The Mobile Workforce’s Missing Participant Problem, is the first to examine the problem from the perspective of the participant and offers unique insights into its various dimensions.
Despite differences big and small, all retirement plan sponsors and record-keepers experience at least one common problem—the seemingly intractable incidence of participants who have left behind small accounts in the plans sponsored by their former employers and failed to update their address when they subsequently change residence, a.k.a. missing participants.
Two weeks ago, I authored an article applauding the American Benefits Council for their October 2nd, 2017 letter to the Department of Labor (DOL), which clearly identified the root causes of missing participants: a highly-mobile workforce and a lack of retirement savings portability. Extending the Council’s insight, I maintained that what’s really “missing” in our defined contribution system are initiatives that move retirement savings forward when participants change jobs, such as auto portability. When implemented, these initiatives could serve to dramatically decrease the overall incidence of missing participants.
On October 2nd, 2017, the American Benefits Council delivered a letter to the Department of Labor (DoL), urging the DoL to act on the problem of unresponsive or missing participants, an issue that has proven to be a significant point-of-pain for plan sponsors.
It’s generally accepted that the small-balance accounts of terminated 401(k) plan participants have been a problem for plan sponsors, resulting in increased plan costs, fiduciary risk and other ancillary problems, such as missing participants and uncashed distribution checks.
Now, based on new information from EBRI and other sources, we’re learning that small accounts are a large and growing problem for active participants as well.
As much as $2 trillion could be retained in the U.S. retirement systems if Auto Portability were fully implemented, according to new research by the Employee Benefit Research Institute (EBRI). The research establishes Auto Portability as a leading retirement industry public policy initiative, placing it ahead of auto IRA initiatives and just behind universal DC coverage in terms of impact on total retirement savings shortfall.
Over the past year, the Department of Labor’s Fiduciary Rule has been highly-visible, presenting major ramifications for the retirement industry and looming large on the radar screens of retirement services providers.
The underlying rationale for the rule, as stated by the Obama administration in an April 6, 2016 press briefing, was to save retirement investors $17 billion per year in lost retirement savings that result from conflicts of interest in retirement advice. Certainly, anything that protects $17 billion in retirement savings is a worthy goal, if it helps more Americans meet their retirement income needs.
However, there’s a larger hole in our retirement system – cash-out leakage – that inflicts far greater harm to American retirement savers, yet this threat continues to fly beneath our collective radar.
On February 3rd, the U.S. Chamber of Commerce, the world’s largest business federation representing the interests of more than 3 million businesses, released Securing America’s Retirement, their legislative roadmap aimed at strengthening the U.S. retirement system.
The Chamber’s goals are admirable.
Under-participation by minorities in America’s 401(k) system represents a significant economic disparity that requires creative, private-sector solutions.
Auto portability – an emerging plan feature that automatically moves small balance accounts forward when participants change jobs – could play a critical role in helping to bridge the participation gap.